INVESTING FOR THE FUTURE

I’ve got spare cash at the end of the month. What should I do with it?

  • 25 May 2020
  • 10 mins
  • For some, the lockdown has seen a surprising uplift in disposable incomes

  • There are many thing you could do with the extra money.

  • How about using it to plan for the future?

There have been some surprising outcomes from the global coronavirus lockdown. Most notable have been the reduction in pollution levels and the suspension of human trespass on natural habitats. Deer and monkeys have been seen in cities in Japan and Thailand; goats and sheep have ventured into Welsh towns and villages; and sea turtles have reclaimed Brazil’s beaches.

According to a study from Stamford University the lives saved from reduced air pollution could be 20 times higher than are lost to Covid19 [1].

And for some there has been a financial one. While many have found themselves furloughed because their businesses have been forced to close or because they cannot perform their job from home, those who can work from home have seen a surprising uplift in their financial position.

According to the Centre for Economics and Business Research (CEBR) the average share of household disposable income that is saved will rise to more than 20% during lockdown. It appears our monthly household spending is, on average, £795 lower than before lockdown measures were announced: that’s a 30% fall [2]. It also suggests that those on furlough could be experiencing the similar benefits despite their decreased income.

This is largely because spending on non-essentials has all but dried up. Even some essentials – like commuting, dry cleaning and the office lunch – are now no longer required.

So what could you do with this unexpected windfall?

Pay down your debts

The first thing anyone should consider doing is reducing their debt burden. Paying high interest rates over a prolonged period is a sure way of reducing your total wealth. According to the Bank of England, credit and store cards carry the highest rate of interest at an average of 18.84% [3]. Bank overdrafts run at around 9.37% [4]; unsecured loans come next at 4.28% [5]; and secured loans like mortgages currently average 2.77% [6].

Read more: Dealing with debt –9 tips

Top up your rainy-day money

It always makes sense to have some money set aside to meet your day-to-day living costs and which you can draw on at fairly short notice. Especially at a time when the prices of investments changes rapidly. You won’t want to be in the position of having to disinvest when values are low.

As a minimum you should consider having sufficient emergency cash to cover at least three months’ essential spending. And if you are expecting to make a large expenditure in the next five years it may make sense to have the money for this readily accessible, too.

However, bear in mind that the value of any cash on deposit will be gradually eroded over time unless the interest rate is higher than the rate of inflation.

Read more: This ISA season, is cash still king?

Consider your investment options

At this point you could start thinking about longer-term savings to support some of your hopes and ambitions. Like being able to retire early, work reduced hours or on a part-time basis, or launch your own consultancy or business.

To achieve most of these you could look to boost your pension savings.

Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Contributions are free from income tax and any growth generated within the plan – whether that is capital growth or dividends reinvested – is free from tax, too.

However, you should be conscious that there is a limit to how much you can put into a pension in any one tax year (called the annual allowance), and a separate limit on how much you can save over your lifetime (called the lifetime allowance). You can find out more here.

Depending on your situation, tax may be due when you come to withdraw money from your scheme.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Don’t forget your ISAs

Pensions are longer-term savings schemes and you can’t generally access them until you reach the age of 55; and this will rise to 57 in 2028 [7]

If you think you might need the money before then, using your ISA allowance also offers some tax benefits. Although investments are made from taxed income, any growth within the account, and all drawdowns, are tax free.

And remember, if you still have ISA savings when you reach retirement, they can offer a tax-free boost to your income.

Read more: Tax efficient tactics for retirement income

Conclusion

They say that every cloud has a silver lining and in the case of the lockdown that can be quite literally true. This could be an opportunity to put yourself on a more solid financial foundation by tackling your debts and/or boosting your long-term savings.

Speaking to a financial adviser can provide that objective voice of reason to help you move forward with a clear strategy and more confidence in your financial future. They can use their knowledge, experience and technology to help illustrate the potential outcomes for each financial decision you make. What if you decided not to pay off your credit cards? What if you decided not to invest but to keep everything in cash? What if you chose one investment strategy over another?

Whilst the options seem simple to comprehend, we can sometimes blind ourselves to the long-term outcomes to focus on short-term decisions. An adviser could help you navigate the possibilities and provide clarity.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Sources:

[1] https://environmentjournal.online/articles/the-lockdown-and-the-environment/ accessed on 8 April 2020

[2] https://cebr.com/reports/23-billion-in-excess-savings-set-to-accumulate-in-q2-as-consumer-spending-declines-dramatically/ 24 April 2020

[3] https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2019&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=CFMZ6KE&UsingCodes=Y&Filter=N&title=CFMZ6KE&VPD=Y accessed on 11 May 2020

[4] https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2019&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=CFMHSDH&UsingCodes=Y&Filter=N&title=CFMHSDH&VPD=Y accessed on 11 May 2020

[5] https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2019&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=CFMZ6KW&UsingCodes=Y&Filter=N&title=CFMZ6KW&VPD=Y accessed on 11 May 2020

[6] https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2019&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=CFMB2CS&UsingCodes=Y&Filter=N&title=CFMB2CS&VPD=Y accessed on 11 May 2020

[7] https://www.pensionsadvisoryservice.org.uk/about-pensions/pension-reform/freedom-and-choice accessed on 14 May

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